<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------- -----------
Commission file number 01-13031
------------------------
AMERICAN RETIREMENT CORPORATION
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Tennessee 62-1674303
- -------------------------------- ------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
111 Westwood Place, Suite 402, Brentwood, TN 37027
- -------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(615) 221-2250
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
----- -----
As of August 14, 1997 there were 11,406,250 shares of the Registrant's common
stock, $.01 par value, outstanding.
<PAGE> 2
This Form 10-Q/A is being filed to include an adjustment to reduce by
$7.7 million the deferred income tax expense for the second quarter of 1997
and the related deferred tax liability. The adjustment reflects additional tax
basis to the Company related to the gain recognized by the Company's
predecessor partnership upon receipt of the $21.9 million reorganization note
issued in connection with the reoganization of the Company prior to its initial
public offering in May 1997.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements (unaudited) Page
<S> <C> <C>
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 ......................... 3
Condensed Consolidated Statements
of Operations for the Three Months Ended
June 30, 1997 and June 30, 1996 .............................. 4
Condensed Consolidated Statements
of Operations for the Six Months Ended
June 30, 1997 and June 30, 1996 ............................. 5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended June 30, 1997
and June 30, 1996 ............................................ 6
Notes to Condensed Consolidated
Financial Statements ........................................ 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations ................................................ 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................. 20
Signatures .............................................................. 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share data) June 30, 1997 December 31, 1996
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,863 $ 3,222
Assets limited as to use 3,462 1,022
Resident and health care receivables 3,912 2,782
Management services receivables 719 565
Inventory 419 420
Prepaid expenses 1,011 340
Deferred income taxes -- 920
-------- --------
Total current assets 31,386 9,271
Assets limited as to use, excluding amounts classified as current 3,183 3,607
Land, buildings and equipment, net 207,020 213,124
Marketable securities 52 52
Other assets 4,431 2,108
-------- --------
Total assets $246,072 $228,162
======== ========
LIABILITIES AND PARTNERS' AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,935 $8,053
Accounts payable 3,042 2,441
Redemption payable -- 5,195
Accrued expenses 6,937 6,239
Accrued partner distributions -- 1,632
-------- --------
Total current liabilities 15,914 23,560
Tenant deposits 4,365 3,850
Long-term debt, excluding current portion 161,324 162,636
Deferred gain on sale-leaseback transactions 4,311 --
Deferred income taxes 2,065 --
Other long-term liabilities 229 234
-------- --------
Total liabilities 188,208 190,280
Partners' and shareholders' equity:
General and limited partners' interests -- 37,882
Common stock, $.01 par value; 50,000,000 shares authorized
11,406,250 shares issued and outstanding 114 --
Additional paid-in capital 60,213 --
Accumulated deficit (2,463) --
-------- --------
Total partners' and shareholders' equity 57,864 37,882
-------- --------
Total liabilities and partners' and shareholders' equity $246,072 $228,162
======== ========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
----------------------------
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Revenues:
Resident and health care revenue $ 22,442 $ 18,085
Management services revenue 437 405
-------- --------
Total revenues 22,879 18,490
Expenses:
Community operating expenses 14,120 11,457
Lease expense (net) 544 --
General and administrative 2,184 1,238
Depreciation and amortization 1,621 1,775
-------- --------
Total operating expenses 18,469 14,470
-------- --------
Income from operations 4,410 4,020
Other income (expense):
Interest expense (3,354) (2,839)
Interest income 214 53
Other (31) (2)
-------- --------
Other income (expense), net (3,171) (2,788)
-------- --------
Income before income taxes 1,239 1,232
Income tax expense - current 92 --
Income tax expense - deferred 2,986 --
-------- --------
Net income(loss) (1,839) 1,232
Preferred return on special redeemable preferred limited partnership interests -- 339
-------- --------
Net income (loss) available for distribution to partners and shareholders ($ 1,839) $ 893
======== ========
Pro forma earnings data:
Income before income taxes, as reported 1,239 1,232
Pro forma income tax expense 471 468
-------- --------
Pro forma income 768 764
Preferred return on special redeemable preferred
partnership interests -- 339
-------- --------
Pro forma income available for distribution to partners and shareholders $ 768 $ 425
======== ========
Pro forma earnings per common share:
Pro forma income $ 0.08 $ 0.08
Preferred return on special redeemable preferred limited partnership interests -- 0.04
-------- --------
Proforma income available for distribution to partners and shareholders $ 0.08 $ 0.05
======== ========
Shares used in computing pro forma earnings per share data 10,124 9,375
======== ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended
---------------------------
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Revenues:
Resident and health care revenue $43,424 $33,888
Management services revenue 965 918
------- -------
Total revenues 44,389 34,806
Expenses:
Community operating expenses 27,519 21,727
Lease expense (net) 1,072 --
General and administrative 4,070 2,421
Depreciation and amortization 3,206 3,165
------- -------
Total operating expenses 35,867 27,313
------- -------
Income from operations 8,522 7,493
Other income (expense):
Interest expense (6,611) (4,733)
Interest income 364 132
Other (61) (8)
------- -------
Other income (expense), net (6,308) (4,609)
------- -------
Income before income taxes and extraordinary item 2,214 2,884
Income tax expense - current 92
Income tax expense - deferred 2,986 --
------- -------
Income (loss) before extraordinary item (864) 2,884
Extraordinary loss on extinguishment of debt -- 2,335
------- -------
Net income (loss) ($864) $ 549
======= =======
Preferred return on special redeemable preferred limited partnership interests -- 714
------- -------
Net income (loss) available for distribution to partners and shareholders ($ 864) ($ 165)
======= =======
Pro forma earnings data:
Income before income taxes and extraordinary item 2,214 2,884
Pro forma income tax expense 841 1,096
------- -------
Pro forma income before extraordinary item 1,373 1,788
Preferred return on special redeemable preferred
partnership interests -- 714
------- -------
Pro forma income before extraordinary item available
for distribution to partners and shareholders 1,373 $ 1,074
======= =======
Pro forma earnings per common share:
Pro forma income before extraordinary item $0.14 $0.19
Preferred return on special redeemable preferred limited partnership interests -- 0.08
------- -------
Pro forma income before extraordinary item available for
distribution to partners and shareholders $0.14 $0.11
======= =======
Shares used in computing pro forma earnings per share data 9,752 9,375
======= =======
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
AMERICAN RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
------------------------------
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (864) $ 549
Adjustments to reconcile net income to operating cash:
Depreciation and amortization 3,206 3,165
Deferred income taxes 2,986 --
Extinguishment of debt -- 2,335
Amortization of deferred gain (102) --
Increase (decrease), net of acquisitions, in cash due to changes in:
Receivables (1,284) 190
Inventory 1 (17)
Prepaid expenses (643) 39
Other assets (333) (59)
Accounts payable 601 248
Accrued expenses 620 1,812
Tenant deposits 502 (17)
Other long-term liabilities (28) (74)
------- -------
Net cash provided by operating activities $ 4,662 $ 8,171
Cash flows from investing activities:
Additions to land, building and equipment (10,851) (2,125)
Acquisition of retirement communities -- (63,184)
Acquisition of assisted living residences (11,524) --
Investments in joint ventures (1,030) --
Proceeds from (purchases of) assets whose use is limit (1,987) 289
Proceeds from the maturity of marketable securities -- 50
Proceeds from the sale of assets 28,789 437
------- -------
Net cash provided (used) by investing activities 3,397 (64,533)
Cash flows from financing activities:
Proceeds from initial public offering, net of expenses 45,221 --
Repayment of reorganization note (21,875) --
Payment of redeemable preferred interests (5,195) (4,805)
Distributions to partners (4,132) (3,576)
Expenditures for financing costs (32) (341)
Proceeds from the issuance of long-term debt 17,132 68,948
Principal payments on long-term debt (20,537) (826)
------- -------
Net cash provided by financing activities 10,582 59,400
Net increase in cash and cash equivalents 18,641 3,038
------- -------
Cash and cash equivalents at beginning of period 3,222 3,825
------- -------
Cash and cash equivalents at end of period $21,863 $ 6,863
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 6,268 $ 3,356
======= =======
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
AMERICAN RETIREMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
American Retirement Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain 1996 amounts have been reclassified to conform with the 1997
presentation. Operating results for the three and six month periods ended June
30, 1997 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1997. These financial statements should be
read in conjunction with the combined and consolidated financial statements and
the notes thereto for the year ended December 31, 1996 included in the
Registration Statement on Form S-1 (No. 333-23197), as filed with the Securities
and Exchange Commission (the "Registration Statement") relating to the Company's
initial public offering on May 30, 1997 (the "IPO").
Prior to the IPO, the Company's facilities were owned, managed and/or operated
by one or more limited partnerships of the Company's predecessor, American
Retirement Communities, LP (the "Partnership" or "Predecessor"). As the Company
is newly formed, all references to the Company in connection with historical
financial data or otherwise include the Predecessor.
2. INITIAL PUBLIC OFFERING
On May 30, 1997, the Company completed an IPO of 3,593,750 shares of common
stock, the proceeds of which (after underwriting discounts and expenses)
amounted to approximately $45.2 million. The Company used approximately $21.9
million of the net proceeds from the IPO to repay the promissory note resulting
from the reorganization discussed below. The balance of the net proceeds are
being used for working capital purposes, including the development and
construction of free-standing assisted living residences and possible
acquisitions.
3. FORMATION OF AMERICAN RETIREMENT CORPORATION AND PRO FORMA ADJUSTMENTS
The Partnership was reorganized concurrent with the IPO such that all of its
assets and liabilities were contributed to the Company in exchange for 7,812,500
shares of common stock and a promissory note for approximately $21.9 million
(the "Reorganization").
7
<PAGE> 8
(a) Pro Forma Earnings Data: The pro forma adjustment reflected on the
statements of operations provides for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, assuming the Partnership was subject to taxes.
(b) Pro Forma Earnings per Share: Pro forma earnings per share are based on the
number of shares which would have been outstanding assuming the partners
had been shareholders and is based on the 7,812,500 shares received as a
result of the Reorganization plus 1,562,500 shares for the approximate
$21.9 million promissory note.
(c) Tax Expense Charge to Income: At the time of the Reorganization and as a
result of the conversion from a limited partnership to a corporation, the
Company recorded as a one-time charge to income a net deferred income tax
expense of approximately $2.9 million resulting from the difference
between the accounting and tax bases of the new corporation's assets and
liabilities.
4. EQUITY
The following table summarizes the Company's equity transactions for the six
months ended June 30, 1997:
<TABLE>
<CAPTION>
Additional
Partners' Common Paid-In Retained
Equity Stock Capital Earnings Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $37,882 $37,882
Net income (loss) 1,599 (2,463) (864)
Partner distributions (2,500) (2,500)
Reorganization Note (21,875) (21,875)
Transfer of partnership equity for
7,812,500 shares of common stock (15,106) 78 15,028 0
Net proceeds from issuance of
3,593,750 shares of common stock 36 45,185 45,221
------------------------------------------------------------------
Balance at June 30, 1997 $ 0 $114 $60,213 ($2,463) $57,864
==================================================================
</TABLE>
5. INCOME TAXES
The total provision for income taxes for the quarter ended June 30, 1997 was
$3.1 million consisting of current income tax expense of $.1 million and
deferred tax expense of $3.0 million. The deferred tax expense includes an
increase in deferred income tax liabilities of $4.5 million primarily related
to the Reorganization. The increase in deferred income tax liabilities is
partially offset by an increase in deferred income tax assets of $2.3 million,
also related primarily to the Reorganization. The Company believes that it is
more likely than not that the benefits of the deferred income tax assets will be
realized. Accordingly, the Company has not established a valuation allowance
against the deferred tax assets. The net deferred income tax liability as of
June 30, 1997 was $2.1 million.
8
<PAGE> 9
6. ACQUISITIONS
In May 1997, the Company acquired assisted living residences in Tarpon Springs,
Florida and Corpus Christi, Texas and a leasehold interest in an assisted living
residence in Victoria, Texas. The total consideration was approximately $11.5
million, of which approximately $8.2 million was financed through mortgage loans
and the remaining $3.3 million was paid in cash.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 , "Earnings Per
Share". This statement establishes and simplifies standards for computing and
presenting earnings per share. SFAS No. 128 will be effective beginning with the
Company's quarter ended December 31, 1997 and requires the restatement of all
previously reported earnings per share data that are presented. Early adoption
of SFAS No. 128 is not permitted. SFAS No. 128 replaces primary and fully
diluted earnings per share. There will be no impact on the calculation of basic
earnings per share for the quarters ended June 30, 1997 and 1996. Diluted
earnings per share is not expected to differ materially from basic earnings per
share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
The statement establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distribution to owners. SFAS No. 130 will be effective for the Company's fiscal
year ending December 31, 1998. Adoption of SFAS No. 130 is not expected to
significantly impact the Company's financial position or results of operations,
including the required comparative presentation for prior periods.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
operating segments, in annual financial statements and would require that those
enterprises report selected segment information in interim financial reports to
shareholders. Operating segments are defined as revenue-producing components of
the enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 will be effective for the Company beginning with the
Company's first quarter of 1998. Adoption of SFAS No. 131 will not impact the
Company's financial position or results of operations.
9
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a national senior living and health care company providing a
broad range of care and services to the elderly within a residential setting.
The Company currently operates 22 senior living communities in 12 states with an
aggregate resident capacity of approximately 5,800. The Company currently owns
12 communities, leases 3 communities pursuant to long-term leases, and manages 7
communities pursuant to management agreements. The Company is currently
constructing or developing 27 assisted living residences with a resident
capacity of over 2,300 and expansions of 7 of its owned or leased retirement
communities and one of its managed communities, which will add additional
resident capacity of 437.
The Company completed the IPO and related Reorganization during the
second quarter of 1997. The IPO provided net proceeds to the Company of
approximately $45.2 million, $21.9 million of which was used to repay a
promissory note resulting from the Reorganization (the "Reorganization Note").
Prior to the IPO, the Company's accounting predecessor operated as a limited
partnership.
The Company reported pro forma income of $768,000, or $.08 per share, on
revenues of $22.9 million for the quarter ended June 30, 1997, as compared with
pro forma income of $764,000, or $.08 per share on revenues of $18.5 million
for the comparable prior year period.
In May, 1997, the Company acquired two assisted living residences and acquired a
long-term leasehold interest in a third. The two acquired residences have an
aggregate resident capacity of 154 and the newly leased residence has a
resident capacity of 90. The two acquisitions were completed at an aggregate
price of $67,000 per unit. During the three months ended June 30, 1997, the
Company also entered into agreements to manage five home health agencies for
third-parties, and commenced operation of additional owned home health agencies
at two of its continuing care retirement communities. The Company currently
operates ten home health agencies based in its owned or leased retirement
communities, and manages five home health agencies for third parties.
The Company is currently developing approximately 27 free-standing assisted
living residences with an aggregate resident capacity of approximately 2,300 at
an aggregate estimated cost to complete and lease-up such residences of
approximately $200 million to $240 million. The Company is currently
constructing an $11.6 million expansion at one of its owned communities and is
constructing, on behalf of the lessor, a $14.0 million expansion at one of its
leased communities. In addition, the Company plans to commence additional
expansions at five of its owned communities, which are expected to cost
approximately $50.0 million to $60.0 million to complete and lease-up. These
seven expansion projects will add capacity to accommodate an additional 615
residents. In addition to the expansion of its owned and leased communities,
the Company is currently managing the expansion of one of its managed
communities.
10
<PAGE> 11
The Company's growth strategy also includes the acquisition of free-standing
assisted living residences and other senior living communities; home health care
agencies; and other properties or businesses that are complementary to the
Company's operations and growth strategy.
RESULTS OF OPERATIONS
The Company's total revenues are comprised of 1) resident and health care
revenues, which include all resident and home health care agency fees, and 2)
management services revenue, which include fees, net of reimbursements, for the
development, marketing and management of facilities and home health care
agencies owned by third parties. The Company's resident and healthcare revenues
are derived from: 1) monthly service fees from independent and assisted living
residents; 2) per visit billings from home health care patients and companion
services clients; and 3) per diem charges from residents receiving nursing care.
The Company's operating expenses are comprised of 1) community operating
expenses, which includes all operating expenses of the Company's owned or leased
facilities, including the expenses of its home health care agencies; 2) general
and administrative expense, which includes all corporate office overhead; 3)
lease expense; and 4) depreciation and amortization expenses.
The following table sets forth, for the periods indicated, certain resident
capacity and occupancy data for the periods indicated:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
END OF PERIOD CAPACITY STABLE(1) TOTAL STABLE(1) TOTAL
------- ----- -------- -----
<S> <C> <C> <C> <C>
Owned 2,912 3,002 3,244 3,365
Leased 483 573 -- --
Managed(2) 2,159 2,159 1,842 2,159
----- ----- ----- -----
Total 5,554 5,734 5,086 5,524
END OF PERIOD OCCUPANCY
Owned 95% 93% 94% 91%
Leased 93% 84% -- --
Managed(2) 93% 93% 95% 88%
----- ----- ----- -----
Total 94% 92% 94% 90%
</TABLE>
- ----------
1 The "stabilized" category includes any community or expansion phase after it
has achieved the earlier of 95% occupancy or been open at least 12 months.
2 As an exception to the "stabilized" definition, 1996 stabilized results do not
include a large managed retirement community with a capacity of over 240
residents which opened in May 1995.
11
<PAGE> 12
The following table sets forth certain selected financial and operating data on
a Same Facility basis. For purposes of the following discussion, "Same Facility
basis" refers to communities that were owned and/or leased by the Company
throughout each of the periods being compared. Revenues on a Same Facility basis
do not include any management services revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 % 1997 1996 %
STATEMENT OF OPERATIONS DATA: ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C> <C>
Monthly/per diem service fees 15,740 14,523 8.4% 30,962 28,803 7.5%
Home health and companion services revenue 2,464 1,486 65.8% 4,424 3,010 47.0%
------ ------ ----- ------ ------ -----
Resident and health care revenue 18,204 16,009 13.7% 35,386 31,813 11.2%
Community operating expense 11,675 10,246 13.9% 22,866 20,570 11.2%
------ ------ ----- ------ ------ -----
Resident income from operations 6,529 5,763 13.3% 12,520 11,243 11.4%
Resident income from operations margin(1) 35.9% 36.0% (0.1%) 35.4% 35.3% 0.1%
Lease expense 499 -- -- 1,027 -- --
Depreciation and amortization 1,160 1,342 (13.6%) 2,260 2,642 (14.5%)
------ ------ ----- ------ ------ -----
Income from operations 4,870 4,421 10.2% 9,233 8,601 7.3%
Other data:
Resident Capacity 2,309 2,309 2,309 2,309
Number of communities 10 10 10 10
Average occupancy rate(2) 95.5% 94.1% 1.4% 95.6% 93.6% 2.0%
Average monthly revenue per occupied unit(3) $2,381 $2,229 6.8% $2,337 $2,220 5.3%
Average monthly expense per occupied unit(4) $1,493 $1,387 7.6% $1,471 $1,398 5.2%
</TABLE>
1 "Resident income from operations margin" represents "Resident income from
operations" as a percentage of "Resident and health care revenue."
2 "Average occupancy rate" is based on the ratio of occupied apartments to
available apartments expressed on a monthly basis for independent and assisted
living residences, and occupied beds to available beds on a per diem basis for
nursing beds.
3 "Average monthly revenue per occupied unit" is total resident and health care
revenues, excluding home health care agency and companion services fees, divided
by total occupied apartments and nursing beds expressed on a monthly basis.
4 "Average monthly expense per occupied unit" is total community operating
expenses, excluding home health care agency and companion services expenses,
divided by total occupied apartments and nursing beds, expressed on a monthly
basis.
12
<PAGE> 13
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1996
Revenues Total revenues were $22.9 million for the three months ended June 30,
1997 compared to $18.5 million for the three months ended June 30, 1996,
representing an increase of $4.4 million, or 23.7%. Resident and health care
revenues increased by $4.4 million and management services revenues remained
essentially unchanged. Of the increase in resident and health care revenues,
$2.2 million, or 50.0%, was attributable to revenues derived from two senior
living communities acquired in May 1996, one assisted living residence acquired
in May 1997, and one assisted living residence leasehold acquired in May 1997.
The remaining $2.2 million, or 50.0%, of such increase was attributable to Same
Facility growth.
Revenues attributable to Same Facilities were $18.2 million for the three months
ended June 30, 1997, representing an increase of $2.2 million, or 13.7%, over
the same period in 1996. Home health care agency and companion services fees on
a Same Facility basis increased by $978,000, or 65.8%, over the prior period.
Monthly/per diem service fee revenue on a Same Facility basis increased $1.2
million, or 8.4%, over the three months ended June 30, 1996. Of this increase,
7% was due primarily to increases in average rates (including adjustments to
Medicare rates) and 1.4% was due to higher occupancy. Same Facility average
occupancy rates increased to 95.5% for the three months ended June 30, 1997 from
94.1% for the three months ended June 30, 1996.
Community Operating Expenses Community operating expenses increased to $14.1
million for the three months ended June 30, 1997, as compared to $11.5 million
for the three months ended June 30, 1996, representing an increase of $2.7
million, or 23.2%. Of the increase in community operating expenses, $1.23
million, or 46.3%, was attributable to expenses from acquired senior living
communities and acquired and newly leased assisted living residences, and 53.7%
of the increase was attributable to Same Facility operating expenses, which
increased by $1.4 million, or 13.9%, over the comparable period of the prior
year. Of such increase, $595,000 was attributable to increases in home health
care agency and companion services expenses. Same Facility operating expenses,
exclusive of home health care agency and companion services expenses, increased
9.2% for the three months ended June 30, 1997 as compared to the comparable
period in the prior year. Community operating expense as a percentage of
resident and health care revenues decreased to 62.9% for the three months ended
June 30, 1997, from 63.3% for the three months ended June 30, 1996. Same
Facility community operating expense as a percentage of Same Facility resident
and health care revenues increased to 64.1% for the three months ended June 30,
1997 from 64.0% in the comparable period in the prior year, primarily due to the
growth of home health and companion services operations. Same Facility operating
expenses exclusive of home health agency and companion services expenses as a
percentage of Same Facility revenues exclusive of home health and companion
services revenue increased to 62.7% for the three months ended June 30, 1997
from 62.2% for the comparable period in 1996, primarily due to effects of the
minimum wage increase as well as delayed recognition of certain Medicare
revenues.
General and Administrative General and administrative expense increased to $2.2
million for the three months ended June 30, 1997, as compared to $1.2 million
for the three months ended June 30, 1996, representing an increase of $946,000,
or 76.4%. Of this increase, $300,000 was
13
<PAGE> 14
directly related to the growth of the Company's home health care agencies and
$240,000 of the increase related to salary and wage expenses of new employees
(excluding those added to support the Company's home health agencies). The
remaining increase of approximately $406,000 resulted from continued investments
in infrastructure necessary to support the Company's growth. General and
administrative expense as a percentage of total revenues increased to 9.5% for
the three months ended June 30, 1997, from 6.7% for the comparable period in the
previous year.
Lease Expense The Company incurred lease expense of $544,000 for the three
months ended June 30, 1997, as a result of a sale-leaseback (the "Sale-Leaseback
Transaction") of two of the Company's retirement communities in January 1997,
and the acquisition of a leasehold interest in an assisted living residence in
May, 1997. The Company did not incur lease expense prior to the Sale-Leaseback
Transaction.
Depreciation and Amortization Depreciation and amortization expense decreased to
$1.6 million for the three months ended June 30, 1997, from $1.8 million for the
three months ended June 30, 1996, representing a decrease of $154,000, or 8.7%.
The decrease was primarily the result of decreases related to the Sale-Leaseback
Transaction partially offset by increases related to the acquisitions of two
retirement communities in May 1996 and one assisted living residence in May
1997. Same Facility depreciation and amortization expense decreased to $1.2
million for the three months ended June 30, 1997 from $1.3 million for the three
months ended June 30, 1996, as a result of the Sale-Leaseback Transaction.
Income from Operations Income from operations increased to $4.4 million for the
three months ended June 30, 1997 from $4.0 million for the three months ended
June 30, 1996, representing an increase of 9.7%.
Other Income (Expense) Interest expense increased to $3.4 million in the three
months ended June 30, 1997, from $2.8 million for the three months ended June
30, 1996, representing an increase of $500,000, or 18.1%. The increase in
interest expense was a result of indebtedness incurred in connection with the
acquisition of two retirement communities in May 1996, offset in part by a
reduction in indebtedness in connection with the Sale-Leaseback Transaction.
Interest expense, as a percentage of total revenues, decreased to 14.7% for the
three months ended June 30, 1997 from 15.4% for the comparable period in the
prior year. Interest income increased to $214,000 in the three months ended June
30, 1997 from $53,000 for the comparable period in the previous year, primarily
due to income generated from the investment of the net proceeds of the IPO.
Income Tax Expense During the three months ended June 30, 1997, the conversion
from a non-taxable limited partnership to a taxable corporation resulted in a
one-time $3.0 million charge to income related to the recognition of a net
deferred income tax liability for the amount of the difference between the
accounting and tax bases of the Company's assets and liabilities.
Net Income As a result of the foregoing factors, the Company reported a net loss
of $1.9 million for the three months ended June 30, 1997. Adjusting for the
effect of the income tax expense
14
<PAGE> 15
referenced above, the Company reported pro forma income of $768,000 for the
three months ended June 30, 1997. For the three months ended June 30, 1996, the
Company reported pro forma income of $764,000, pro forma income available for
distribution to partners and shareholders of $425,000, and net income of
$893,000. The adjustment for net income available for distribution to partners
and shareholders relates to $10 million of preferred limited partnership
interests which were fully redeemed in January 1997.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1996
Revenues Total revenues were $44.4 million for the six months ended June 30,
1997 compared to $34.8 million for the comparable period in 1996, representing
an increase of $9.6 million, or 27.5%. Resident and health care revenues
increased by $9.5 million, and management services revenues increased by
$47,000. Of the increase in resident and health care revenues, $6.0 million, or
62.7%, was attributable to revenues derived from two senior living communities
acquired in May 1996, one assisted living residence acquired in May 1997, and
one assisted living residence leasehold acquired in May 1997. The remaining $3.6
million, or 37.3%, of such increase was attributable to Same Facility growth.
Revenues attributable to Same Facilities were $35.4 million for the six months
ended June 30, 1997, representing an increase of $3.6 million, or 11.2%, for the
comparable period in 1996. Home health care agency and companion services fees
on a Same Facility basis increased by $1.4 million, or 47%, over the comparable
1996 period. Monthly/per diem service fee revenue on a Same Facility basis
increased $2.2 million, or 7.5%, over the comparable 1996 period. Of this
increase, 5.5% was due primarily to increases in average rates (including
Medicare rate adjustments) and 2.0% was due to higher occupancy. Same Facility
average occupancy rates increased to 95.6% for the six months ended June 30,
1997 from 93.6% for the comparable period in 1996.
Community Operating Expenses Community operating expenses increased to $27.5
million for the six months ended June 30, 1997, as compared to $21.7 million for
the comparable period in 1996, representing an increase of $5.8 million, or
26.7%. Of the increase in community operating expenses, $3.5 million, or 60.3%,
was attributable to expenses from acquired senior living communities and
acquired and newly leased assisted living residences, and 39.6% of the increase
was attributable to Same Facility operating expenses, which increased by $2.3
million, or 11.2%, over the comparable 1996 period. Of such increase, $948,000
was attributable to increases in home health care agency and companion services
expenses. Same Facility operating expenses, exclusive of home health care agency
and companion services expenses, increased 7.4% for the six months ended June
30, 1997 as compared to the comparable period in 1996. Community operating
expense as a percentage of resident and health care revenues declined to 63.4%
for the six months ended June 30, 1997 from 64.1% for the comparable period in
1996. Same Facility community operating expense as a percentage of Same Facility
resident and health care revenues declined to 64.6% for the six months ended
June 30, 1997 from 64.7% for the comparable period in 1996. Same Facility
operating expenses exclusive of home health agency and companion services
expenses as a percentage of Same Facility revenues, exclusive of home health and
15
<PAGE> 16
companion services revenue decreased to 62.9% for the six months ended June 30,
1997 from 63.0% for the comparable period in 1996.
General and Administrative General and administrative expense increased to $4.1
million for the six months ended June 30, 1997, as compared to $2.4 million for
the comparable period in 1996, representing an increase of $1.6 million, or
68.1%. Of this increase, $580,000 was directly related to the growth of the
Company's home health care agencies and $427,000 of the increase related to
salary and wage expenses of new employees. The remaining increase of
approximately $642,000 resulted from continued investments in infrastructure
necessary to support the Company's growth. General and administrative costs as a
percentage of total revenues increased to 9.2% for the six months ended June 30,
1997 from 7.0% for the comparable period of the prior year.
Lease Expense The Company incurred lease expense of $1.1 million for the six
months ended June 30, 1997, primarily as a result of the Sale-Leaseback
Transaction, as well as the acquisition of a leasehold interest in an assisted
living residence in May 1997. The Company did not incur lease expense prior to
the Sale-Leaseback Transaction.
Depreciation and Amortization Depreciation and amortization expense increased
to $3.2 million for the six months ended June 30, 1997, representing an increase
of $41,000, or 1.3% over the comparable period of the previous year. This
outcome was primarily the result of decreases related to the Sale-Leaseback
Transaction partially offset by increases related to the acquisitions of two
retirement communities in May 1996 and one assisted living residence in May
1997. Same Facility depreciation and amortization expense decreased to $2.3
million for the six months ended June 30, 1997 from $2.6 million for the six
months ended June 30, 1996, as a result of the Sale-Leaseback Transaction.
Other Income (Expense) Interest expense increased to $6.6 million for the six
months ended June 30, 1997 from $4.7 million for the comparable period in 1996,
representing an increase of $1.9 million, or 39.7%. The increase in interest
expense was related to indebtedness incurred in connection with the acquisition
of two senior living communities in May 1996. Interest expense, as a percentage
of total revenues, increased to 14.9% for the six months ended June 30, 1997
from 13.6% in 1996. Interest income increased to $364,000 for the six months
ended June 30, 1997 from $132,000 for the comparable period in 1996.
Income Tax Expense The conversion from a non-taxable limited partnership to a
taxable corporation in May 1997 resulted in a one-time $3.0 million charge of
income related to the recognition of a net deferred income tax liability for the
amount of the difference between the accounting and tax bases of the Company's
assets and liabilities.
Net Income As a result of the foregoing factors, the Company reported a net
loss of $864,000 for the six months ended June 30, 1997. Adjusting for the
effect of the income tax charge referenced above, the Company reported pro forma
income of $1.4 million for the six months ended June 30, 1997. For the six
months ended June 30, 1996, the Company reported pro forma income before
extraordinary item of $1.8 million, pro forma income before extraordinary item
16
<PAGE> 17
available for shareholders of $1.1 million, and net income of $549,000. The
extraordinary item related to a January 1996 debt restructure. The adjustment
for net income available for distribution to partners and shareholders relates
to $10 million of preferred limited partnership interests which were fully
redeemed in January 1997.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the IPO, the Company received approximately $45.2 million net
proceeds, after deducting underwriting discounts and other offering costs. The
Company used $21.9 million from the IPO to repay the Reorganization Note to the
limited partners of the Predecessor. The Company expects to use the remaining
$23.3 million of net proceeds from the IPO to fund its growth strategy.
The Company has traditionally financed its activities from net proceeds from
private placements of equity interests, long-term mortgage borrowing, and cash
flows from operations. At June 30, 1997, the Company had $167.3 million of
indebtedness outstanding, including $144.3 million payable to General Electric
Capital Corporation ("GECC"), with fixed maturities ranging from December 31,
2001 to April 30, 2003. The Company has the capacity to borrow up to an
additional $17.0 million from GECC to finance future acquisitions or expansions.
The Company also maintains a $2.5 million secured line of credit with a bank
that is available for working capital and to secure various debt instruments. At
June 30, 1997, approximately $2.3 million of this line of credit had been used
to obtain letters of credit. The Company also maintains a $5.0 million line of
credit with a bank that is available for land acquisitions. At June 30, 1997,
$2.9 million was outstanding under this line of credit.
All of the Company's owned communities are subject to mortgages. Nine of the
Company's twelve owned communities serve as blanket collateral for the
indebtedness payable to GECC described above. As of June 30, 1997, approximately
71% of the Company's indebtedness bore interest at fixed rates, with a weighted
average interest rate of 8.6%. The Company's variable rate indebtedness carried
an average rate of 7.9% as of June 30, 1997. Less than 15% of the Company's
currently outstanding indebtedness matures before December 31, 2002.
The Company has entered into non-binding letters of intent (the "REIT
Facilities") pursuant to which Nationwide Health Properties, Inc. ("NHP") and
National Health Investors, Inc. ("NHI"), at the Company's request and upon
satisfaction of certain conditions, would develop, construct, or acquire up to
$110.0 million and $100.0 million, respectively, of senior living communities
and lease the communities to the Company.
Net cash provided by operating activities was $4.7 million for the six months
ended June 30, 1997, as compared with $8.2 million for the six months ended June
30, 1996. The Company's unrestricted cash balance was $21.8 million as of June
30, 1997, as compared to $3.2 million as of December 31, 1996, primarily as a
result of the proceeds from the IPO.
Net cash provided (used) by investing activities was $3.4 million and ($64.5
million), respectively, for the six month periods ended June 30, 1997 and 1996.
During the six months
17
<PAGE> 18
ended June 30, 1997, the Company acquired an aggregate of $11.5 million of
assisted living residence assets, made capital expenditures in an aggregate
amount of $10.9 million, and sold an aggregate of $28.8 million of assets,
primarily in the Sale-Leaseback Transaction.
Net cash provided by financing activities was $10.6 million and $59.4 million,
respectively, for the six month periods ended June 30, 1997 and 1996. Offering
proceeds, net of repayment of the Reorganization Note, as discussed above, were
$23.3 million. In January, 1997, the Company redeemed the remaining $5.2 million
of preferred partnership interests in its Predecessor, and made $1.6 million of
cash distributions to the limited and general partner owners of its Predecessor.
Prior to the IPO, the Company made a final $2.5 million cash distribution to the
limited and general partner owners of its Predecessor. Following the IPO and
conversion from partnership to corporate form, the Company does not anticipate
declaring or paying cash dividends on its Common Stock in the foreseeable
future. The Company intends to retain future cash flow to fund its growth
strategy.
During the six months ended June 30, 1997, the Company repaid $14.6 million of
indebtedness with a portion of the proceeds from the Sale-Leaseback Transaction,
repaid a $2.3 million term loan, and made $3.6 million of principal payments on
its long-term debt. During the six months ended June 30, 1997, the Company
incurred $8.2 million of new long-term debt in connection with the acquisition
of two assisted living residences and incurred $8.9 million related to
construction activity.
In May 1997, the Company acquired an assisted living residence in Tarpon
Springs, Florida. The purchase price for the residence was $4.6 million and was
financed primarily through a $3.5 million mortgage loan provided by a bank. The
residence was licensed and opened in August, 1997.
In May 1997, the Company acquired an assisted living residence in Corpus
Christi, Texas and acquired a long-term leasehold in an assisted living
residence in Victoria, Texas. The purchase price for the Corpus Christi
community was approximately $5.8 million, and the Company financed the
acquisition primarily through a $4.7 million mortgage loan provided by NHI. The
purchase price for the Victoria community leasehold was approximately $1.1
million. The lease provides for annual lease obligations of approximately
$468,000. The Company has also entered into 5 joint venture agreements with
third parties pursuant to which it will develop 6 assisted living residences
with a resident capacity of approximately 500.
The Company is currently constructing an $11.6 million expansion at one of its
owned communities, and a $14.0 million expansion for the benefit of the lessor
of one of the retirement communities sold and leased back in the Sale Leaseback
Transaction. The Company also plans to expand certain of its other owned
communities; to open home health care agencies at certain of its owned and/or
leased communities that do not currently operate home health care agencies;
18
<PAGE> 19
to develop new assisted living residences; and to acquire assisted living
residences and selected senior living and health care services assets.
The Company expects that its current cash, together with cash flow from
operations, the REIT Facilities, and the proceeds of borrowings available to it
under existing credit arrangements, will be sufficient to meet its operating
requirements and to fund its anticipated growth for at least the next 12 to 18
months. The Company expects to use a wide variety of financing sources to fund
its future growth, including public and private debt and equity, conventional
mortgage financing, and unsecured bank financing, among other sources. There can
be no assurance that financing from such sources will be available in the future
or, if available, that such financing will be available on terms acceptable to
the Company.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
federal securities laws, which are intended to be covered by the safe harbors
created thereby. Those statements include, but may not be limited to, the
discussions of the Company's operating and growth strategy, including its
development plans and possible acquisitions. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, those set forth under the caption "Risk Factors" in the Registration
Statement. Although the Company believes that the assumptions underlying the
forward-looking contained herein are reasonable, any of the assumptions could
prove to be inaccurate, and therefore, there can be no assurance that the
forward-looking statements included in this Form 10-Q will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statement included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved. The Company undertakes no
obligation to publicly release any revisions to any forward-looking statements
contained herein to reflect events and circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
19
<PAGE> 20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 --- Financial Data Schedule for SEC use only.
b. Reports on Form 8-K
None
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
American Retirement Corporation
Date: February 13, 1998 By: /s/ George T. Hicks
----------------- -------------------
George T. Hicks
Chief Financial Officer
(principal financial and
accounting officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 21,863
<SECURITIES> 0
<RECEIVABLES> 4,631
<ALLOWANCES> 0
<INVENTORY> 419
<CURRENT-ASSETS> 31,386
<PP&E> 222,575
<DEPRECIATION> 15,555
<TOTAL-ASSETS> 246,072
<CURRENT-LIABILITIES> 15,914
<BONDS> 161,324
0
0
<COMMON> 114
<OTHER-SE> 57,750
<TOTAL-LIABILITY-AND-EQUITY> 246,072
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<TOTAL-REVENUES> 44,389
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<FN>
<F1>"The Company's conversion from a non-taxable limited partnership to a taxable
corporation in connection with its May 1997 initial public offering resulted in
the recognition of a non-recurring deferred income tax charge of $3.0
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<FN>
</TABLE>
